A turnaround in home improvement

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Lowe’s (LOW) is the world’s second-largest home improvement retailer, with sales of $90 billion in fiscal 21, notes Christopher Grajaanalyst at Argus Searcha leading independent Wall Street Research firm.

We believe CEO Marvin Ellison demonstrates the experience and ability to improve operations and increase profitability at Lowe’s. The company improved its business analytics, updated its website and streamlined its Canadian operations, which should lead to market share gains and better margin performance.

Mr. Ellison has spent more than a decade improving customer service and efficiency at Home deposit (HD). Most recently, he served as CEO of JC Penney. We believe his experience in the very challenging department store industry gives him a sense of urgency to constantly improve operations at Lowe’s and take nothing for granted.

Among his first steps, he hired David Dentonas as chief financial officer. We have known Mr. Denton for many years, dating back to his role as Chief Financial Officer of SVC (CVS). He successfully managed a complex organization, focused on dividend increases and shareholder-friendly share buybacks, and provided clear financial direction and objectives. As he did at CVS, he begins his presentation by conference call with the capital allocation.

Our multi-year bullish thesis hinges more on improving activity than the macro environment. The company is committed to increasing operating margin across a range of sales scenarios and gaining market share by improving merchandising and expanding its product offering.

We believe that the main drivers of sales growth post-pandemic remain the same. There has been a significant underinvestment in housing. About 70% of American homes are over 25 years old and likely need renovations and repairs. Millennials are starting families. Mr Ellison told the 1Q22 conference call that the company’s research results show the importance of the home will be high for many years to come.

The shares are currently trading at 21 times our FY22 estimate and 20 times our FY23 estimate. We believe LOW is attractive based on the company’s financial strength and our expectations for market share gains, improved margins and earnings.

According to our analysis, the shares would be worth approximately $320 using a dividend discount model with our new earnings estimates. Our valuation for Lowe’s reflects our five-year growth rate of 14%, which declines to 3% as the business and turnaround matures.

The shares have an indicated dividend yield of approximately 1.3%. The company has increased its dividend at an annual rate of 17% over the past five years and we expect further increases. We are confident in CEO Ellison’s turnaround plan amid continued strong demand for home improvement products and are raising our target price to $290.

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